tv Nightly Business Report PBS July 13, 2009 7:00pm-7:30pm EDT
captioning sponsored by wpbt >> susie: from retailers to manufacturers to the corner deli hundreds of thousands of small businesses depend on financing from cit group. but the nation's leading small business lender is fighting for survival and a bankruptcy filing could tear through the economy. >> jeff: a trillion dollars and counting. what stood at just $286 billion at this time last year has ballooned. the federal budget deficit now tops a trillion dollars thanks to bank and auto bailouts. >> susie: speaking of bailouts, we meet an auto parts firm not waiting for a helping hand from uncle sam. johnson controls is going back to basics from the past, to build a business for the future. >> jeff: then, the future of the markets, now that the economic recovery's not so certain. our guest, market strategist joe battipaglia of stifel nicolaus. >> susie: i'm susie gharib.
station from viewers like you. thank you. >> susie: good evening, everyone. another major financial firm is fighting for survival tonight: this time it's cit group, a big new york-based company that lends to small and medium size businesses. its shares plummeted and its credit rating fell today on speculation the 100-year-old company will be forced into bankruptcy because it can't meet its credit obligations. as scott gurvey reports, a collapse of cit could hurt thousands of american businesses. >> reporter: it's the little guys. the neighborhood hardware store. the dry cleaner. the laundromat. the local deli. these small businesses. the kinds of customers the big banks don't want to be bothered with. sameer gokhale of keefe, bruyette and woods, which provides investment banking services to cit, says these are the businesses that will suffer most if the lender goes under.
>> if cit goes bankrupt you have a lot of retailers that will face financial challenges. you'll have a lot of small businesses facing challenges. and, you know, some people have argued you know if cit goes under, they go bankrupt they'll be larger banks that will come in to fill the void. and i think that could be partially true. but cit has been around for a hundred years and traditionally larger banks have gone after larger fish. >> reporter: cit is the north american leader in factoring and small business administration loans. it is the sole or main provider of revolving lines of credit to hundreds of manufacturers and hundreds of thousands of retailers who need between 10 and 50 million dollars to run their business. but with the recession many of those borrowers have been hit hard and cit has seen many of its loans go bad. since becoming a bank holding company last december, cit has received funds through the tarp program. but the federal deposit insurance commission is concerned about deterioration of
cit's assets. the agency's been sitting on the company's application for help via a temporary liquidity program. s&p analyst matthew albrecht says cit's problem is that washington does not consider it too big to fail. >> i think that's a pretty good indicator from the government that, that they're certainly not convinced that cit is an important player. i think, and that's really what i think cit's application to that program i think it really depends on that. you know, can they convince the government that they're an important cog in the economy, especially from a small and medium sized business standpoint. >> reporter: secretary timothy geithner has the authority to handle the c.i.t. crisis. but won't say what, if anything, the government might do to help. scott gurvey, "nightly business report", new york. >> jeff: here's a striking development. the federal deficit has topped $1 trillion for the first time ever. and we are only nine months into the federal fiscal year. darren gersh has some perspective on this fiscal milestone.
>> reporter: $1.1 trillion is enough to give every worker in the united states ten and a half weeks of paid vacation. $1.1 trillion is also about enough to provide health care coverage to every uninsured american for a decade. but is $1.1 trillion too much debt for the united states to pile on this year? budget expert stan collender doesn't think so. >> everyone, chill out. this is exactly what we should be doing right now. be grateful that the government is getting it right. >> reporter: right, collender says, because we have an economy to fix and that requires government spending to boost demand. but $1.1 trillion is a dramatic symbol with 11 zeros. each one telling budget watchdog maya macguineas the day of fiscal reckoning is coming soon. >> what we're doing is we are borrowing to keep the economy afloat and this is a short term strategy. the problem is that the trillion dollars is a reminder that we don't have any plan to stop borrowing at an unsustainable level.
>> reporter: some perspective here: the us economy's annual output is $14 trillion, and the national debt is now north of $11 trillion. that's a lot, but what really matters is the cost of carrying that debt, and that is dropping. down 25% so far this year to $143 billion. with interest rates at rock bottom, the u.s. government is getting quite a deal on financing. but that won't continue if, in two to three years, the rest of the world loses faith in our fiscal backbone. >> at some point, the chinese, the person in the country that's buying the most amount of u.s. debt at the moment, are probably, for either foreign policy, or economic or financial reasons, going to say, "no mas." now, they'll say it in chinese, but they're just going to say "no more" for one reason or another. what the government needs to do, what our government needs to do, is get ready for that day. >> reporter: $1.1 trillion is a mind-boggling amount of money, but in a few months, we may be asking how much is $1.8 trillion or even $2 trillion? after all, the federal deficit
is still climbing. darren gersh, "nightly business report", washington. >> jeff: wall street was looking past the budget deficit, to the flow of analysts reports for clues on upcoming report cards from the nation's banks for guidance. and bulls liked what they saw. goldman sachs received an upgrade from an influential banking analyst, and that set off a stampede into the financials. by noon, the index was up 130 points and stairstepped its way back above the 8300 level by the closing bell.
>> susie: our guest tonight says even though the markets rallied today, he does not think this is the start of a bull market. in fact, he's putting most of his clients' money in cash, not stocks. joining us now, joe battipaglia, market strategist of the private client group at stifel nicolaus. hi, joe. >> hi, susie. >> well, say it ain't so. why are you so cautious? >> i'm cautious for the u.s. economy is on very weak footing. the financial system still we leverage -- deleveraging and the consumer won't be back for quite some time. so when you look the an riment where wages are actually if decline, job losses continue, the consumer is to the coming back any time soon. businesses have overbuilt and overborrowed. we're just now going into the corrective phase of that. you can see by way of what is happening at cit that there are more shoes to drop in that regard.
as a result, the economy doesn't get back to growth until next year. the growth is very slow. and i think earnings expectations are just too optimistic. and the euphoria about bank stocks comes about simply because the treasury and the federal reserve have designed to set of steps to prop up the banking system. it's an artificial prop, we're still not fully healthy yet and investors will sell them off on the other side. >> speak of those bank stocks there is a lot of eagerness this week about banks reporting their earnings, today a prominent analyst upgraded goldman sachs stock so a lot of people are thinking that the coast is clear for the financials. what are you saying on that? >> well, our upgrade was on a short-term basis because, indeed, when the federal reserve uses quantitative easing to get 0% were rate, when the treasury, fdic and federal reserve provide banks guarantees for losses. when they change the accounting rules so they don't have to take losses on mark to market, you can create any earnings power you want. but for long-term call that
the banks are going to have much less leverage than they had before. they are going to be more highly regulated than they were before. when there raitt -- interest rate goes to their natural level, they run natural now, it will change the dynamic of the interest rate margins in such a way that now all tease banks will be very profitable. so adding to that an exslended recessionary condition and i think that the banks still have a long way to go before they are trauly healthy. >> now you told me that your asset allocations two-thirds cash, and one-third stock. so you are putting some of your client money into stocks. i know you can't talk about specifics but what sectors do you find attractive right now in. >> yes, this is our equity program. we are paid to go out and take risk for investors. back in january and february we were actually 95% in cash. so we've actually loosened up a little bit if you will. and what we're looking to find are companies that have strong balance sheets that we can withstand recessions, companies when they pay dividends can continue to pay it during recessions. we want companies that are not involved with government guarantees it or bailout because the government
crowds them out. as a result, we look very favourably on areas like health care, technology, consumer staples companies. because they have this dynamic. we take a relatively dim view of financials because of the qon going problem. energys are all over the map but with a low energy price many of these companies don't have the earnings power they had in the past. and industrials have a long way to go in order to right themselves for credit conditions first and then expansion in the united states at some point while anemic for the foreseeable future. >> so joe, for investors who are listening to what are you saying tonight, and they have some money on the side and they're wondering what to do with it, should they put new money into the stock market now or should they wait? >> i think the right strategy here is to identify these companies with that financial strength that i talked about. because the market clearly is much more attractive now at these levels than it was at the highs a year and a half ago. but you want to enter those investments over time because the market will be bumpy in the meantime. so strong balance sheets,
ability to pay the dividend during recessions. and staying away from government involvement in their business is the right formula for building out your portfolio. and i'm not going to discriminate between big stocks or small stocks or one sector or another because this bear market that we are working through has leveled all these sectors. and so you are given an opportunity to rebuild a portfolio into strength as opposed to weakness. >> you can give us any glimmer of when you see that the stock market will pick up for real, that it will be a real rally? >> well, we have an estimate for earnings this year on the s&p 500, 50 to 55 dollars, next year 60 to 65 dollars in rough terms, thative fws the market a range between 750 and a thousand in rough terms. so we came close to the upper-end of that range. we have been selling off for that. i can understand why we are doing. as we continue to work through recessions, that range stays in place. and i think the best thing to do is keep broadening out on the basis of financial strength so when we look at 2011, 12 and 13 these companies will have i much
better profile on the marketplace. >> all right, interesting analysis. thank you so much for coming on the program. >> you are very welcome. >> pie guest joe battipaglia >> susie: my guest tonight: joe battipaglia of stifel nicolaus. >> jeff: now, let's take a look at some stocks in the news tonight.
and those are the stocks in the news tonight, susie. >> susie: jeff, now that general motors and chrysler are out of bankruptcy, the head of the president's auto task force is stepping down. steven rattner is returning to private life in new york city. replacing him will be former steelworkers union leader ron bloom. the task force's main job now is to oversee the government's stake in chrysler, g.m., and its g.m.a.c. financial services arm. >> jeff: meanwhile, just four days out of bankruptcy and the new general motors is getting down to business. g.m.'s working with a private equity firm to buy key assets from delphi, helping its former parts making division get out of chapter 11. if approved, the deal could save the parts maker from liquidation. g.m. would get delphi's steering business and four other plants that make parts. california-based platinum equity would take the rest of delphi's operations. the price tag: almost $4 billion. >> susie: delphi's predicament is one example of how the meltdown in the auto industry has spread to parts makers.
some suppliers are surviving by looking for new business, while others are getting back to basics. johnson controls is doing just that. for two decades it's been one of the largest makers of auto seats and interiors. but, it's also been keeping buildings warm and cool for more than a century. diane eastabrook explains why the milwaukee-based firm is turning up the heat on that business. >> reporter: johnson control's 42-year-old headquarters has become the company's hottest marketing tool for what it call its building efficiency business. c.e.o. stephen roell delights in showing off a renovation at the massive office complex which includes solar panels. >> they provide basically what was a fourth of the energy for our campus. >> reporter: a geothermal system warms and cools the facility-- and sky lights help illuminate work areas. roell thinks the world is only beginning to embrace energy conservation and that could mean big bucks for johnson controls. >> i think people really want to go to renewable. i think it's just a function of when they get into the economics
they need to understand that it is a part of an energy conservation plan in total. >> reporter: johnson controls made its mark in heating and cooling 125 years ago when founder warren johnson invented the thermostat. throughout the twentieth century the company built, installed, and serviced heating and air conditioning systems. during the past twenty years johnson controls made most of its money making vehicle interiors. but as its own plants became more efficient and auto sales started slowing the company began trimming its automotive division about a year ago. roell admits he had no idea how smart that decision would be. >> no one would have ever projected and we certainly didn't that the market would decline by almost half. >> reporter: now, johnson control's return to its roots is starting to pay off. the company is retrofitting the empire state building with a new climate control and lighting system. it also could cash in on government stimulus projects making everything from schools to office buildings more energy efficient. there's also the battery business.
johnson controls currently makes the lion's share of lead acid car batteries. now it's moving into lithium ion batteries for plug-in hybrids. the company is making some of those batteries in france for mercedes benz. in a couple of years it will build them in the u.s. for ford. and roell says those batteries could provide a bonus. >> what people are perceiving is that you could actually drive the vehicle during the day and then do two things: charge it at night, but you could also potentially have some of that battery power transferred from the vehicle to the home and then the home could actually have power that it could use during the day. but, diane that's a very early stage. >> reporter: like most u.s. companies, johnson controls has struggled in the first half of the year, but expects sales and profits to rebound in the second half. morningstar auto analyst david whiston thinks the company diversity makes it a good bet in any economy. >> you combine that with a healthy balance sheet, a healthy dividend, and a steady dividend that has been around since 1887 it could be a good play for some investors.
>> reporter: and roell is confident johnson controls is building a more profitable future, by making buildings energy efficient. diane eastabrook "nightly business report" milwaukee. >> jeff: tomorrow, credit unions serve 79 million customers in the u.s. a look at how they're doing in light of the financial crisis. >> susie: there could be a settlement in the works in an irs crackdown on secret swiss bank accounts. a federal judge today delayed a trial where the tax agency hoped to force swiss bank ubs to reveal the names of americans who hold secret offshore accounts. the feds say 52,000 americans are using the accounts to avoid paying taxes here. the bank says revealing their names would breach swiss privacy laws. >> jeff: employees of social networking site facebook are getting a chance to cash in on their success. russian investment firm digital sky technologies has started buying employees' common shares in facebook. the price: $14.77 per share.
tonight's commentator says this is the right time for health care reform. she's alice rivlin, senior fellow at brookings and former vice chair of the federa reserve. >> with the economy in deep recession and the budget deficit off the charts, should the president postpone his ambitious quest for health reform? absolutely not: he should push harder to get comprehensive reform enacted now. millions of workers are losing health coverage along with their jobs and many more fear this will happen to them. businesses are reducing health coverage and workers with diminished incomes are struggling to pay their doctor bills. how could we have a more dramatic illustration of why we need basic health coverage for everyone that does not depend on the ups and downs of employment? moreover, currently soaring deficits relate to the recession itself and financial system
repair. these deficits will recede as the economy improves, but the long run budget picture remains grim. the best hope for reducing the rate of growth of federal spending in the future is making health care delivery more efficient so that we get more care per dollar. reducing waste requires investment in information systems, analysis of effective treatments, and new reimbursement systems that favor efficiency. without comprehensive reform the wastefulness of our current health care system will continue. both the recession and concern about future budget deficits argue for accelerating comprehensive health reform, not retreating from it. i'm alice rivlin. >> susie: and finally tonight, talk about the power of positive thinking. new polls show that despite americans out of work, home values plunging, and 401-k's looking like 201-k's, we are feeling less stressed about debt.
the recession is forcing us to take steps to get out finances in better shape. and as a result, experts say, we're taking charge of our lives, and feeling better about it. but, we're still a nation of borrowers. if you run the numbers, jeff, for every $100 an average household earns, it owes $124 in some kind of debt. >> ouch, pulling the belt and wait for the economy to turn around, i guess. >> good advice. >> jeff: that's "nightly business report" for monday, july 13. i'm jeff yastine. goodnight, everyone and good night to you, susie. >> susie: goodnight, jeff. i'm susie gharib. we hope to see all of you again tomorrow evening. "nightly business report" is made possible by: